NACWA Releases Memo on Ratepayer Fund Diversion

(July 16, 2020) – The COVID-19 pandemic has caused an issue to resurface that some public clean water utilities periodically face: the potential diversion of utility ratepayer funds to fill gaps in other areas of a city (or other governmental body’s) budget.

At the request of several NACWA members whose cities are facing increased budgetary pressures as a result of the coronavirus, NACWA conducted a brief legal review to determine whether there was any national law or guidance addressing whether such diversions are permissible.

While NACWA found that the practice of diverting utility revenue for purposes other than the provision of clean/safe water services is often publicly frowned upon, there is no national precedent addressing the issue and state laws differ as to whether and when the practice is lawful. Some states clearly ban ratepayer fund diversion, while others provide for it under certain circumstances, particularly where those funds qualify as “surplus.” 

NACWA’s review provides a brief overview of the laws in New York, California, North Carolina, South Carolina, and Arkansas to demonstrate the divergent ways states address the issue.

However, while state laws vary with respect to ratepayer fund diversion, NACWA also found that language in bond covenants and, to a lesser extent, consent decrees may provide public wastewater utilities some protection against revenue diversion, and may further prove useful to utilities seeking to access city stimulus funds related to the coronavirus pandemic.

We are asking members to review and provide feedback on the memorandum so that, in addition to providing information to clean water utilities as they move forward in addressing the economic ramifications of the pandemic, it can serve as the catalyst for a longer-term dialogue on a topic that has the potential to continue to impact wastewater utilities in the future.

Please provide any information you are willing to share concerning your experience with ratepayer fund diversion issues, how they may be addressed in your city/state, and any other factors you feel may be relevant to the memorandum or the broader discussion to Amanda Aspatore, NACWA’s Chief Legal Counsel. NACWA will update the document moving forward as additional information is received.